Growth is explained as a story of metrics.
They are the bullet-point metrics that founders rattle off to anyone else who asks to provide a brief snapshot of progress.
And for the most part, it’s relatively easy for businesses who have survived the first three or so years to know which metrics make up their traction narrative.
It’s not that simple for early-stage ventures.
During the early years, founders do one of two things in relation to measurement; fixate on one or two venture-specific metrics that are tied to their original thesis, or they leave metrics for another day and rely on qualitative events that take place.
Neither of these work for an early stage venture.
Most founders will tell you that while the thesis may remain the same or similar from day one, the customers, products and distribution channels inevitability change. These changes usually make the one or two metrics the company started tracking from day one inappropriate or obsolete.
And ventures don’t survive on qualitative insight alone.
I think it’s important for ventures to capture as much useful data as possible from day one. And because it can take a while to work out what is worth measuring, I look to one measure which is universally important for all ventures.
Revenue Growth Rate
The revenue growth rate is as much a mindset as it is a quantitative metric. It is the speed at which revenue increases (or decreases) each week, month, quarter or year but it also:
- Focuses founders on the importance of revenue (which can get lost in the depths of product development and marketing)
- Applies to ALL business models (including marketplaces) regardless of the age and stage of a venture
- Aligns founders on the value of time and the rate at which their business is developing
The subtle message for early-stage businesses is that revenue growth rate should be the ‘light on the hill’ metric from day one.
It is the one metric that should be front of mind as work begins on figuring out what to measure in growth experiments because revenue solves a lot of problems. And the faster revenue can be generated, the quicker the business can deliver on its vision.
My colleague Garry Visontay talked about this in a recent post.
Growth usually requires investment. And when it comes to external investment, founders need to think carefully about how to approach investors.
Revenue growth rate and other key metric growth rates metrics play an important role in convincing investors to commit. This is more difficult for pre-revenue ventures trying to close a ‘friends and family’ or seed round of funding.
When grappling with how to demonstrate momentum pre-revenue founders make the mistake of presenting one or two metrics that they hope will look convincing to investors.
I’ve heard founders say ‘Facebook only uses two metrics (User Growth and Time Spent On-Platform) to describe their growth’.
The truth is that works one out of ten times.
A two-measure traction story usually only works when ventures consistently achieve product/market fit at scale.
Instead, I encourage founders to move into funding rounds with a revenue growth rate mindset and a collection of traction-related stories using these six themes to demonstrate momentum in their startup.
If you have it, show it. Convincing people to pay for a product or service is one the greatest challenges for new businesses. It’s also one of the strongest lead indicators of growth.
Obviously, customer growth is tied to revenue growth and it may be more important than revenue if the company is pursuing a massive opportunity and charging a small price.
WhatsApp charged 1 USD/user/annum prior to being acquired by Facebook February 2014. At the time they had 430M monthly active users.
User growth and retention, insights about user behaviour and the proportion of users converting into customers are an essential part of showing off a freemium model.
Partnerships are the most efficient pathway to growth today. Ventures that operate single actor business models (i.e. you sell to one customer at a time) benefit from distribution partnerships.
Ventures that generate value through a marketplace model (e.g. inkl which creates convenience and value for news publishers and readers) benefit from both supplier and distribution partnerships.
Founders should use Memorandums of Understanding and partnership agreements as evidence of growth through partnerships.
Although a more qualitative approach, reviews should not be underestimated, particularly if you sell or produce software. App store reviews and testimonials on websites can send a convincing message that there is a there, there!
6. Experiment Outcomes
This is one of my favourites and in my opinion, isn’t put on show nearly enough by founders. Hypothesis and data-driven founders often discover how to grow their businesses well in advance of those who use less structured approaches.
Presenting insights from key experiments that demonstrate not only progress but a replicable discipline to assess opportunities is very useful.
I also encourage founders to share the number of experiments currently underway when talking to investors. It often adds an additional layer of depth to the relationship and helps the founders stand out.
One more thing
Use a ‘revenue growth rate mindset’ and a collection of traction stories to explain growth. It helps investors understand the effort and holistic approach being made to find product/market fit and grow the business.
It also helps investors identify opportunities for how they can add value beyond capital (e.g. helping to accelerate the closure of a deal or helping optimise sales funnels).
The final thing on explaining growth is to know your audience.
The best investors have enough experience to know the challenges you’re facing and how likely you are to negotiate them. Don’t bullshit them with expressions they will see right through or charts that always paint your venture in the best positive light. It’s one thing to hustle. It’s quite another to develop a relationship.
Be authentic, show ambition and demonstrate you have what it takes to achieve the mission. Using a revenue growth rate mindset and a collection of traction stories to demonstrate growth has helped me many times. I hope it helps you too.